Global Policy Forum

Oil and Gas Had Help. Why Not Renewables?

The recent bankruptcy of Solyndra, a large solar power company backed by the U.S. government, has called into question whether the government should be providing support for renewable energy projects. The author, Robert B. Semple Jr., argues that it should because new technologies are inherently risky, and bringing them to market on a large scale often requires public capital and support to reduce the risk to the private sector. He notes that there is a long tradition of this in the U.S. energy sector, including providing land grants to help build the coal industry, Defense Department support for the nuclear industry and tax breaks and credits for the oil and gas industry.

By Robert B. Semple Jr.

October 15, 2011

The bankruptcy of a single solar-panel company, Solyndra, has catapulted the question of federal energy policies into the news. It has also led many people to draw exactly the wrong conclusions about federal support for energy innovation and where the policies should be headed.

Solyndra was clearly a bad bet for the government, which now stands to lose all or part of about $500 million in loan guarantees. But one case hardly discredits the whole idea of government support for energy innovation. The federal government has always been in the energy business, and with good reason. Private capital may be good at identifying and incubating new technologies, but bringing those technologies to commercial scale often requires significant public capital.

Land grants, for instance, helped build the coal industry, Depression-era spending created hydroelectric dams, and the Defense Department helped develop the first nuclear reactors. The oil and gas business benefited hugely from tax breaks like the oil depletion allowances that go back to the 1920s and were intended to encourage production in what was then a risky game.

Subsidies for newer technologies follow in that tradition. As priorities have changed and many politicians have come to realize that fossil fuels exact big social costs, federal subsidies have swung slowly toward projects that produce wind and solar power and biofuels from crops and plant matter.

The chart — which focuses on tax breaks and credits to promote development of various types of fuel — shows the trend. (The nuclear industry is not included; its subsidies are largely direct grants and loan guarantees, not tax credits.)

Tax incentives for fossil fuels surpassed $12 billion during the price spikes of the late 1970s and early ’80s, then plunged — partly because tax subsidies tied to the price of oil declined when prices did.

As the chart suggests, Congressional interest in renewables like wind and solar rises and falls with the price of oil. The oil shocks of the 1970s and President Jimmy Carter’s personal commitment to alternative fuels inspired a burst of enthusiasm that tapered off along with oil prices.

Then, in 2005, with prices rising, Congress passed a comprehensive energy bill loaded with incentives for renewables. That bill, plus President Obama’s stimulus package, have propelled tax credits for renewable energy, principally wind and solar, from virtually nothing 10 years ago to more than $7 billion today. (This includes $4.2 billion in direct grants provided in 2009 to companies that could not take advantage of the tax credit because of the financial crisis.) The same impulses inspired a renewed interest in energy-efficient buildings; largely because of the Obama stimulus, tax incentives for efficiency jumped to $2 billion in 2010. Corn ethanol continues to get a tax subsidy of about $6 billion annually, even though its production almost certainly contributes to rising food prices and is of dubious environmental value.

Subsidies for non-fossil fuels now dominate the picture. The Congressional Research Service estimates that benefits for wind, solar, ethanol and energy efficiency account for three-quarters of the $20 billion total of annual federal tax support.

The chart also illustrates that Congress, for political reasons, can also get things wildly wrong. The spike for fossil fuel subsidies in 2007 was caused almost entirely by a short-lived credit for synthetic fuel produced from coal. The fuel proved to be immensely unprofitable, and all 59 plants producing it closed. The 2009 spike in incentives for renewables was created by another short-lived tax break, for “black liquor,” a diesel-like substance produced from pulpwood that created a one-time bonanza for paper companies.

Renewables and efficiency are finally getting the attention they deserve but are still playing catch-up. At a time when oil is vulnerable to international disruption and fossil fuels are identified as the main culprit in global warming, robust federal efforts to help develop cleaner — and ultimately cost-competitive — energy make perfect sense.


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